The Sterling plummeted Wednesday while U.S. Dollar rallied


The British Pound tumbled down today due to a fresh inflation report. According to new data, U.K. consumer prices increased much more than analysts calculated. Investors fear that the British economy may be hurtling toward a deep recession. Moreover, they expect the Bank of England to hike its rates less aggressively next month.

Matthew Ryan, the Head of Market Strategy at Ebury, noted that the Sterling declined against other major currencies after another upside surprise in the latest British inflation data. Meanwhile, the outlook for the U.K. economy is still relatively murky, with rising consumer prices and borrowing costs. The government is also in chaos, with its credibility taking a hit. That doesn’t inspire much confidence in investors. Besides, there is a lot of uncertainty as to the pace of upcoming BoE interest rate hikes.

The sterling shaved off 0.57% on Wednesday, exchanging hands at $1.12570. Britain’s annual consumer price inflation soared to 10.1% in September, jumping higher than expected. It returned to a 40-year peak reached in July. Market participants expect the Pound to trade under pressure in the short term. Aside from the outlook for surging inflation, there is a possible economic recession to consider. The latter could cause the BoE to increase rates by 75 basis points instead of 100 bps at its November meeting.

On Wednesday, the U.S. dollar rallied by 0.2% to 149.61 yen versus the Japanese currency, hitting this point for the first time since August 1990. The greenback remained at a 32-year high against the Yen during this session. It also managed to rebound from a two-week low against a basket of major currencies. Overall, the dollar index jumped by 0.7% to 112.74 today after plunging to the lowest level since October 6 at 111.76 in the previous session.


What caused the U.S. dollar’s sudden rally? 

The greenback is one of the most popular safe-haven currencies on the market. It declined this week as some upbeat earnings followed the bearish trade in equities globally. However, inflation news in Britain and the Japanese Yen’s continued drop strengthened the dollar, along with traders pricing for two more 75 bps rate increases from the Federal Reserve this year. The agency focuses on surging inflation and aims to bring it down even if the process results in an economic recession.

Meantime, the struggling Japanese Yen remains in the spotlight. Investors are waiting for the Bank of Japan and the country’s Ministry of Finance to step into the FX market again, especially with the USD/JPY pair moving toward the key psychological barrier at 150.

On Wednesday, Japanese Finance Minister Shunichi Suzuki stated that he was closely watching currency rates. The government will likely intervene again if the Yen continues trading at dangerously low levels.

Unlike other central banks, the Bank of Japan refuses to tighten its monetary policy to hinder inflation. It focuses on underpinning a suffering economy instead. However, such a decision pushes traders toward other major currencies, causing the Yen to decrease.

In Europe, the euro also plummeted by 0.8% to $0.97800 on Wednesday. It dropped from Tuesday’s high of $0.98755; a level last reached on October 6. Analysts expect the European Central Bank to hike rates by another 75 bps on Thursday of next week.

On the other hand, the New Zealand dollar continued rallying. This week, it gained 2% thanks to Tuesday’s consumer price data. The latter raised investors’ expectations that the Reserve Bank of New Zealand would continue aggressive tightening. The Kiwi exchanged hands lower by 0.16% at $0.56770 compared to Tuesday’s two-week high of $0.5719, but it was still on the high level.


How are the EM currencies faring? 

South Africa’s rand tumbled down on Wednesday against the dollar. The new data showed consumer inflation slowed for a second consecutive month in September, but it wasn’t enough to boost the currency. The rand shaved off 0.3% against the greenback in early trading.

Simon Harvey, the head of FX analysis at Monex Europe, noted that the data came in largely as economists expected. As a result, it has had a largely limited impact on the rand.

Overall, EM currencies dropped by 0.2%, while stocks declined by 1.2%. The Chinese Yuan also fell versus the U.S. dollar. The Polish zloty and the Romanian leu ended in the red, while the Czech crown traded flat against the euro. However, the Hungarian forint soared by 0.3% against the common currency.


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